Risk of balance-of-payments crisis abating for India; RBI to sharpen focus on reducing inflation: Charles Gave, Gavekal Research

Crude oil and macroeconomic stability

India’s rising non-dollar oil imports from Russia mean the risk of a balance-of-payments crisis is no longer a worry for the RBI. The central bank can now sharpen its focus on reducing inflation, said Charles Gave, founder of global investment research firm Gavekal Research.

In an interview with Moneycontrol, Gave also said a stronger bond market can incentivise Indian citizens – among the world’s top holders of gold and silver – to shift a part of their savings to high-yielding bonds.

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He described these as the “unintended effects” of the Ukraine war, which has led to Russia selling its crude oil to countries like India and accepting currencies other than the US dollar in return.

This, he said, takes the pressure off the Reserve Bank of India (RBI).

“Any central bank has at least two objectives -- managing the domestic inflation rate and managing the external position to avoid a balance of payments crisis, as in Asia at the end of last century. Now that India is able to pay for its energy in local currency, the risk of a balance of payment crisis has disappeared, which will allow the RBI to concentrate on reducing the inflation rate,” he argued.

The best way to succeed in that endeavour is to maintain policy rates at least 100 bps above the inflation rate all the time, he added.

The RBI kept the key benchmark policy rate unchanged at 6.5 per cent at its previous policy meeting in April. The repo rate has seen six consecutive hikes aggregating to 250 basis points since May 2022 as part of the central bank’s efforts to douse inflation.

India's retail inflation fell to a 15-month low of 5.66 percent in March. Except for November and December 2022, retail inflation has remained above the RBI's upper tolerance level of 6 percent since January 2022.

Gave added that the RBI’s policy shift from avoiding a current account deficit to the new goal of reaching price stability will mean a targeted inflation range of 0 to 2 percent.

“If the inflation rate were to move to 2 percent, policy rates could go to 5 percent or below, which would be great for long-duration assets in India. I have never believed that a developing economy needs a high inflation rate to develop. It needs stable and reasonable inflation, and as long as prices are not actually falling, the lower the better,” he said.

RBI Governor Shaktikanta Das, at the post-policy presser on April 6, had also said that trade in currencies other than the dollar is expected to improve steadily.

Meanwhile, according to reports, India and Russia have suspended efforts to settle bilateral trade in rupees after months of negotiations, which could be a setback for Indian energy importers. Moscow is open to the option of being paid in Chinese yuan or other currencies.

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However, Russia remained the top supplier of crude oil to India in the month of April as Moscow continues to supply crude at discounted prices.

Russia has been diverting its oil to Asian countries, especially India and China, after the European Union (EU) and the US imposed a slew of sanctions on Moscow following the Ukraine war.

Gave further said the best way for India to deal with structural macro problems would be to maintain the policy rate above inflation “to prevent the inefficient people from having access to capital”.

Also Read: Oil trade in rupee can be ‘game changer’ for India, says Gavekal Research

In a recent note, Gavekal Research said Indian citizens hold what may be the world’s biggest private sector inventory of gold and silver.

“If the Indian bond market starts to return more than gold and silver over the medium term, then part of the Indian savings will get out of silver and gold to capture these extra returns,” Gave pointed out.